The Senate Takes a (Payroll Tax) Holiday

The political battle over extending the payroll tax holiday is understandably confusing for many Americans, so it is worthwhile to step back and see how we got into this mess. Americans have come to expect Washington’s lamentable dysfunction, but this instance is of a different sort than most.

First, the issue: A 2 percentage point cut in the federal payroll tax, enacted for 2011, is set to expire at the end of the year. The policy was dubbed a “holiday,” not because it was enacted during Christmas, but because it was supposed to be temporary. American workers were granted a holiday from a bit of the payroll tax. As most Americans likely understand by now, in Washington when a policy is labeled temporary, that means periodic fights to extend it—temporarily, of course.

Second, if the payroll tax holiday expires, American workers will see a nasty tax hike to start the new year. This would not be welcome to families struggling to pay their bills. It would also not be welcome to politicians in a year in which most will stand for re-election.

Thus, there is very broad agreement that the payroll tax holiday should be extended through 2012. The President called for that. The Senate supports it. The House supports it. The majority of Republicans support it. The majority of Democrats support it. Given all this agreement, why is the payroll tax holiday expiring? Obviously, this is not your typical Washington foul-up.

It’s important to remember that the payroll tax holiday has not and will not stimulate the economy as the President hopes. True, the economy appears to be finally showing signs of strengthening, and we should all be pleased at that. But if so, then it is strengthening because that’s what the U.S. economy does as it overcomes Washington’s past and current policy mistakes. The newfound strength, if true, is not due to the payroll tax holiday enacted last January. If the payroll tax holiday really worked to stimulate the economy, the effects would have been felt most in the second quarter of 2011—a time when the economy not only failed to accelerate, it nearly stalled out entirely.

Families are facing the possibility of higher taxes to start the new year because the Senate couldn’t wait to get to its Christmas holiday. Having waited to the 11th hour to take up the matter, the Senate found tough sledding as it tried to pass a one-year extension of the holiday the President asked for and on which nearly all concurred. But all the Senate could agree on was a two-month extension, merely buying a grace period for workers with the expectation that the Senate would then return to Washington to pass a bill to extend the holiday for the balance of the year.

But having passed this minimalist bill, the Senate did not wait to see what the House of Representatives would do. Forty-eight hours was all they needed to learn if the House would follow suit. It would have been wise to wait. Instead, Senate Majority Leader Harry Reid (D–NV) tried to jam the House as Senators bolted for the airports, trains, and highways for their cherished vacation.

The House, apparently made of stouter stuff, refused to take the easy road and so found a way to pass a bill extending the holiday for the full 12 months, as the President asked, not just the two months the Senate managed. And then the House had the audacity to call for regular order in this season of cheer, to proceed to a conference with the Senate, iron out the differences between the bills, and pass the result. Then and only then, having completed their work in good order, all the Members of the House and Senate could go home to enjoy the holidays having earned a small measure of joy, showing the nation they can get a few simple things done right.

Unfortunately, the Senate was gone. There was no one with whom to conference, and Senator Reid refused to call his body back into session. Apparently, once a Senator is home for Christmas, that’s it, even if it means risking higher taxes on working families.

And there the issue remains as Christmas and the new year approach. And, somehow out of all of this, President Obama and the mainstream media conclude that the House of Representatives, which followed the regular order, which passed the better bill with the full extension the President asked for, is at fault for the impasse.

In the end, this will be much ado about nothing. If, as expected, Congress fails to do the right thing to extend the payroll tax holiday before it expires, then Congress will come back to start the year and extend it retroactively, and hopefully the Senate can manage to do better than a measly two-month extension. This is no way to legislate, and it is all the more discouraging since all sides agree on the policy.

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JD Foster is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation. His primary focus is studying long-term changes in tax policy to ensure a strong economy. He also examines changes in Medicare, Medicaid and Social Security so they are both affordable and more effective.

Join The Discussion

PLEASE PLEASE PLEASE stop calling it a "payroll tax". All taxes withheld on a paycheck are "payroll taxes". This tax is a "Social Security tax" and all Americans should be made aware that Congress and the President are accelerating the bankruptcy of the Social Security system. Tax reduction should be made to "income taxes", period – and permanently, not temporary.

why is the President and senate democrats dramatizing this? what reason does he have to agree to a year of tax cuts and when everything is in place he then changes it to two months? what's his specific reason to shorten the tax cuts by 10 months and then point out the republicans for holding up the line? How is the democrat senate two month way more productive then a year??? and at the last minute while the democrat senate goes off on their merry Christmas way leaving Americans and their own constituents lost and confused dropping the bag on their big brother republicans they always hide behind to carry the weight of their "senate democrats" dereliction???? specifics from the President is required!!!

Exactly. I usually love this stuff (petty in fighting between the two parties, as well as within.) I am smoke coming out the ears over this. I know that eliminating these Social Security payments is endangering SS, but I am 31, and from the Mid-west and I want Keystone. SS is something I am not entirely certain I'll get, Keystone, to me, represents jobs that I can (well, not me specifically, but members of my cohort.) My vote goes with Keystone.

Bob you are are spot one. This is not a "payroll tax" and am amazed that even The Heritage Foundation gets is wrong. This all sounds great but in the end it is taking money out of the Social Security trust fund.

Someone has to explain to me why home owners are the ones that have to pay for this with a new "fee" on new mortgages. Also, why do they keep saying $40.00 average saving per week? I don't think the average income in this country is $100,000. per year.

Retired, I don't have a dog in this fight but I think it is more of the same tax and spend folks recklessly giving money we don't have to pander for votes. In addition, as Bob states, it is taking money from the social security fund (which will have to be paid back with money we don't have since we are in deficit spending). If people buy the political spin and gamesmanship going on in Wash dc, I hope they aren't the ones who will vote. The dem senate, with Obama are a disaster for America fiscally, socially and in world affairs.

Until the Speaker caved to the Senate bill, I was pretty proud of him for standing on principle. This Senate bill is just another CR in my view, and all these CR's and ensuing fights accomplish is bad PR for the GOP because they have the audacity to even try to hold the line on spending and promote market stability. Senate Democrats know this, and Boehner played right into their hands…again.

Obama asked for a jobs bill; the House gave him one that green lights the Keystone pipeline, which will create jobs. Obama asked for a full-year extension of the reduced SS tax; the House extended it so. Unfortunately, both versions kick the can down the road with the "doc fix".

Although the Speaker wants the Senate bill, the members must still vote for it. Will the Speaker get his wish? Will Tea Party members do the easy thing or the right thing? This is a test of their will to fight the establishment on both sides which must be done if the Republic will be preserved. Everyone running for office says they are conservative, but the question is who has the guts to fight when the going gets tough?

Ok, The President was so vocal about extending the Social Security Tax for 2 months, when on January 1 of this year, seniors with pensions were omitted from the Bush Tax Cuts. My pension was reduced by a thousand dollars because of new federal taxes. Now 51% of our nation work force doesn't pay any federal taxes which is abomination. Our freedoms are being eroded by the socialist we have elected.

Seniors take it on the chin. On January 1 of this year, our elected officials in Washington threw us seniors under the bus when they failed to include retirement pensions in the Bush Tax cuts. The same crap President Obama was pushing for in his 2 month extension for the working class. What a joke.

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